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What is Foreclosure?

“What is foreclosure?” is a question a lot of people have, especially if they’re a new homeowner or have never heard of foreclosure before. When a homeowner fails to pay their mortgage, the negative effect is foreclosure.

When a renter fails to pay their rent or lease, they’re evicted. Since they don’t have a loan against the residence, they are simply asked or in worse cases, ordered to vacate the premises and the black mark goes on their credit. But when someone has a mortgage on a property and they fail to pay the mortgage, the lender forecloses on the homeowner.

The Foreclosure Process

Technically, foreclosure is a legal process where the owner forfeits all of their rights to a home they are living in or renting out to somebody else (e.g. a rental property). Assuming the homeowner cannot catch up on their outstanding balance or sell the house through a short sale, the home will then be sold at a foreclosure auction.

When it comes to foreclosures, in real estate the term used is “homeowner” but it’s actually a misnomer because unless the homeowner has paid off their mortgage in full, they are actually the “borrower” because the bank owns the house. The borrower goes out and gets a loan (a mortgage) against the house, minus their down payment. A lien is placed on the property, thereby making it a secured loan.

When the Homeowner (Borrower) Fails to Pay

Home loans are secured loans because the house itself is the “collateral.” So, when a borrower/homeowner falls behind on their loan, the lender can recover a lot of their losses by seizing the property and selling it to someone else at an auction.

“Three to six months after the homeowner misses a mortgage payment, assuming the mortgage is still delinquent, and the homeowner has not made up the missed payments within a specified grace period, the lender will begin to foreclose. The further behind the borrower falls, the more difficult it becomes to catch up on payments because lenders add fees for payments that are late, often after 10 to 15 days,” according to Investopedia.

If your home is threatened by foreclosure, you may be able to save it by filing a Chapter 13 bankruptcy. To learn more, read, “Can Bankruptcy Save My House in Pennsylvania?” and contact our York Chapter 13 firm for a free case evaluation!

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